Fooled by Randomness. Black Swans, Donkeys and Turkeys.

Last week James Governor kindly bought me lunch and gave me a book. The curry was very good, but the book has had a profound impact on me. It is not often that I finish a book, and then immediately read it again. Nassim Nicholas Taleb’s book, Fooled by Randomness is such a book.

Throughout my business studies at university, I heard a lot about the rational man. Rationality became something assumed. At the centre of most economic, efficient market and business theory is the rational, self interested behaviour. This book knocks that on the head.

Nassim has performed format c: on a goodly portion of my naive assumptions about financial markets and life in general. He has validated lots of what Francis Antonie and Douglas Irvine taught me as a political philosophy student years ago and I’d forgotten. It is time to dust off Karl Popper, and start thinking again.

Photo from Flickr by launceston_lad

Black swans are symbolically important, because until Australia was discovered, it was believed that all swans are white. This is a good example of a logical fallacy. There is a difference between there is no evidence of black swans, and there is evidence of no black swans.

We humans tend to fall into the induction trap. I do it a lot.

In the airport on the way home I spotted his new book. It has the title, you guessed it, Black Swan. I was glad my flight was delayed. I could read more of it. He Americanises Betrand Russell’s chicken, turning it into a turkey.

“My major hobby is teasing people who take themselves & the quality of their knowledge too seriously & those who don’thave the guts to sometimes say:I don’t know.…” (You may not be able to change the world but can at least get some entertainment & make a living out of the epistemic arrogance of the human race).

Nassim writes very well, the prose is tight and buzzword free. He doesn’t dumb things down and he explains without being condescending. He merges a fantastic knowledge of the classics with a profound grasp of probability. He is witty but serious.

So many new things to learn, and so much that I learned decades ago but need to rediscover: Hindsight bias, Platonic folds, logical fallacy, epiphenomena, exquisite cadavers, induction, Mandelbrot, Hume, Wittgenstein’s ruler, negative skewness, Extremestan and Mediocristan.The list goes on.

My readers will have noticed I’ve been working on trying to understand risk recently, and Nassim’s work has made me realise that risk isn’t as simple as I thought it was. After spending most of my adult life avoiding statistics, I’m realising the folly of my ways.

Great post Thomas. There are some problems with the kind of thinking that Nassim applies. For my part I believe that while it is always important to apply critical thinking to the process of reviewing what it is we hold to be true, there is always the risk of taking it to an extreme.

I’ve not read the book (OK – so it’s now on my latest book shopping list!) so I won’t criticise but I do believe the reason we construct stories in certain situations is to make sense of the incomprehensible.

As someone who was in NYNY shortly after 9/11 and who experienced the sense of what it was like living in the aftermath of those events, it is easy to see why we construct modern fairy stories so we can at least draw some comfort. However ridiculous those stories may appear. And in that, I don’t think we should ever under-estimate the human ability to survive by whatever means possible.

On the issue of risk, my sense is that what we’re really doing is trying to pare down the list of improbabilities to a minimum. But just as we can’t prevent the determined fraudster, neither can we know when the next lightning bolt will strike. As long as we remember that, we’ll get pretty close to an optimal – if imperfect – solution. IMO.

Dennis,
Thanks for the comments.
It seems you are agreeing with Nassim, rather than disagreeing with him. The narative fallacy, Hindsight bias.

From Wikipedia..
He also believes that people are subject to the triplet of opacity, through which history is distilled even as current events are incomprehensible. The triplet of opacity consists of
1.an illusion of understanding of current events
2.a retrospective distortion of historical events
3.an overvalue of facts, combined with an overvalue of the intellectual elite

aaah – Clarification. I’m simply saying why people do what they do. I don’t necessarily agree it is appropriate. And yes, I tend to fall on Nassim’s side of the fence – but warily. Post modern deconstructivist thinking can wreck my brain cells 🙂